Property

THREE

The Domain of Property

IN THIS CHAPTER WE CONSIDER the domain of property. What sorts of things or interests in things can be held as property? Does the domain of property change over time, and if so how do we account for such changes? What principles determine the limits on the range of interests that can be regarded as property?

The Demsetz Theory

We start with a famous theory offered by Harold Demsetz to explain changes in the domain of property over time.¹ According to Demsetz, property is an institution for internalizing externalities associated with the use of scarce resources. An externality is some benefit or cost generated by one person’s activity that is involuntarily borne by some other person.

Suppose you own land abutting a small lake. One of your neighbors dumps waste material into the lake, with the result that large numbers of fish in the lake die. The pollution of the lake is a negative externality associated with the neighbor’s dumping activity that is borne (in part) by you, the landowner. After this episode, suppose another neighbor builds a fish hatchery in an attempt to restock the lake. To the extent the neighbor succeeds, the restocking will be a positive externality experienced (in part) by you, the landowner.²

Starting with a famous article about externalities written by Ronald Coase in 1960,³ economists have long been aware that one way to internalize positive and negative externalities is through contracts. Suppose the landowner in the previous example identifies the would-be dumper before the pollution takes place. Such an identification might lead to a contract between the owner and the dumper, in which the dumper would agree, in return for some consideration, not to dispose of the waste material in the lake. The offer of such a contract would internalize to the would-be dumper the negative externalities that otherwise would be borne by the landowner, because now the dumper would have to take those costs into account—as represented by the price the landowner is willing to pay to secure the agreement of the dumper not to pollute. Similarly, the neighbor thinking of starting a fish hatchery might decide to condition his or her willingness to do so on the other landowners on the lake agreeing to contribute to the hatchery. The offer of such a contract would internalize the positive externalities associated with the hatchery, because now the neighbor would take into account more of the benefit when incurring the cost of providing it.

The Demsetz theory posits that another way of internalizing externalities associated with the use of resources is by establishing property rights in the resource. Property rights, as Demsetz understood them, are rights to exclude others from specific things or resources. By creating such exclusion rights and conferring them on an identified owner, many of the benefits and costs associated with the use of the resource—which otherwise would be experienced as externalities by others—will instead be borne by the owner. By giving the owner exclusive control over the resource, decisions that affect the value of the resource in a positive or negative direction will be captured by the owner. The owner thus has a powerful incentive to take these benefits and costs into account in deciding how to use the resource, just as one would if one could enter into contracts with other affected persons about these benefits and costs.

As Demsetz further observed, this incentive extends to costs and benefits that will be realized after the owner’s death. As he put it, “an owner of a private right to use land acts as a broker whose wealth depends on how well he takes into account the competing demands of the present and the future.”⁴ When resources are held in an open-access state, in contrast, there is no such broker to represent the interests of the future, because there is no owner who can internalize the claims of future generations. The result is likely to be that “the claims of the present generation are given an uneconomically large weight in determining the intensity with which the land is worked.”⁵

Consider again, by way of illustration of these points, the small lake in our previous example. Suppose, first, that no one owns the lake; it is an open-access resource (see Chapter 2). Under this arrangement, if one person pollutes the lake, this imposes a cost in the form of reduced opportunities to catch fish in the future. This cost will be borne by all persons who might want to fish in the lake. Consequently, most of the cost is experienced as an externality by persons other than the one who pollutes. Similarly, if one person were to stock the lake, this would create a benefit in the form of increased opportunities to catch fish in the future. But again, most of the benefit would be experienced as an externality by persons other than the one doing the stocking. The predictable result of this open-access arrangement would be too much polluting—overconsumption of the resource—and too little stocking—underinvestment in the resource.

Now, change the arrangement so that one person is the owner of the lake and hence can exclude all other persons from the lake. If the owner of the lake pollutes, the cost this imposes, in terms of reduced opportunities to catch fish in the future, will be borne entirely by the owner. Likewise, if the owner decides to stock the lake, the benefits this creates, in terms of increased opportunities to fish in the future, will be captured entirely by the owner. Even if the owner is too old to look forward to catching these fish during the owner’s own lifetime, the stocking will increase the value of the lake, and the owner can capture this higher value by selling or donating the lake to others who can look forward to catching them. Because the owner internalizes the full costs of pollution and the full benefits of stocking, the owner has an incentive to weigh these costs against the advantages of polluting activities, and to weigh the risks and potential return from stocking. The problems of overconsumption and underinvestment associated with the open-access regime are significantly reduced.⁶

If property has these desirable cost-internalization features, why aren’t all resources owned? Here Demsetz offered an important insight: Just as Coase pointed out that making and enforcing contracts to control externalities is costly, so Demsetz observed that establishing and enforcing property rights is costly. It is necessary to define the resources subject to ownership, specify how owners are identified, set up an institution to resolve disputes over ownership, and devise mechanisms for enforcing ownership rights. These activities consume resources that could be devoted to doing something else. Putting together the advantages of property, in terms of internalizing the costs and benefits of resource use, and the costs of property, in terms of the resources needed to establish and enforce property rights, we get the complete Demsetz theory. Stated affirmatively, this says that property rights in resources will be established when the internalization benefits associated with property rights exceed the costs associated with establishing and enforcing property rights. Stated negatively, if the costs of establishing and enforcing property rights exceed the benefits of internalization from establishing and enforcing property rights, resources will remain in an unowned (open-access) state.

The Demsetz theory has several important implications for the types of things that will be owned as property. First, for something to be governed by a property regime, there must be enough demand for the resource relative to its supply that internalization of externalities associated with use of the resource will produce significant benefits. Some things are so plenteous that, even if they are very important to sustaining human life, there will be no perception of scarcity and hence no point in internalizing externalities. The atmosphere and the oceans have historically been regarded as the “common right” of all mankind, in part because they have been regarded as so plentiful that no one would bother to try to assert exclusive rights over them. This can change of course. In recent decades, one important resource associated with oceans—fisheries—have become increasingly distressed, and stocks of fish have declined, sometimes precipitously. In response, we have seen movement toward establishing exclusive economic zones in ocean fisheries, regulatory limits on total catch in certain ocean fisheries, and even the creation of systems of individual permits to fish that are bought and sold, called individual tradeable quotas (ITQs). Evidence suggests that ITQs where implemented have generally halted and sometimes reversed the trend toward collapse of fisheries.⁷ This broad movement toward exclusion rights in response to scarcity is consistent with what the Demsetz theory would predict.

Second, if something is regarded as having no value, or negative value, it is also unlikely that the thing will be treated as property. Animal droppings, for example, are generally regarded as a nuisance—a negative value product—and ordinarily no one claims property rights in animal waste. Tellingly, however, if such waste does have value, disputes over ownership can arise. This is suggested by a famous case about horse manure gathered in piles at the side of a public roadway.⁸ The manure had no value to the travelers whose animals dropped it. But once collected it had positive value as fertilizer, and this gave rise to a dispute over who owned it (the gatherer as it happened).

Third, property in a given class of resources is unlikely to exist if there are high costs of establishing and enforcing such rights. A famous example is provided by rangeland in the American west.⁹ Rangeland was regarded as an open-access resource for most of the nineteenth century. Any one could graze animals on the open range. This led to overgrazing, which quite arguably reduced total output from raising livestock. In theory, division of the land into separately owned tracts would have offered a solution, but this was far from costless. One problem was that traditional fencing materials, such as wooden rails, were scarce on the plains, which made it expensive to demarcate individual grazing tracts by fencing. With the invention of barbed wire, it became much cheaper to divide rangeland into separately owned parcels. Consistent with the Demsetz theory, widespread enclosure of the land soon followed. Cheaper fencing material lowered the costs of defining and enforcing private property in land, and this changed the cost-benefit equation.

In general, rights in some assets are easier to delineate and enforce as property than other assets. Rights in land and tangible personal property such as clothing and automobiles are relatively easy to delineate and enforce as property. Rights in other resources, such as wild birds, water in underground aquifers, or abstract ideas are much more difficult to delineate and enforce. This can be because the resource moves around (birds), or is difficult to observe (underground water), or is inherently difficult to specify (abstract ideas). Not surprisingly, we find that objects that fall into one or more of these categories tend to resist treatment as property.

Notice that the Demsetz theory identifies some general conditions in which property, especially in the sense of exclusion rights, are likely to emerge, but has nothing to say about whether the response will be to create traditional private property, communal property, public property, or some type of public regulation such as a permitting scheme. Demsetz suggested that the particular history and cultural conventions of the society will be important in determining the “type” of property that evolves. This is undoubtedly true, but does not provide much guidance in predicting the path of future institutional development.

Notice too that the Demsetz theory fails to specify a causal mechanism by which property rights get created. Resources are held in an open-access state at time T₁, under one combination of benefits and costs, and then move to a property regime at time T₂, under a different combination of benefits and costs. But we are not told exactly how the change from T₁ to T₂ comes about. Commentators have debated whether the causal mechanism is more likely to be bottom-up, with property evolving from informal social norms, or top-down, with “property entrepreneurs” lobbying the government to pass laws that authorize new forms of property.

The top-down theory has a certain plausibility if creating a new type of property entails a large upfront investment. Assume a lake subject to open access yields $1000 worth of fish to ten different fishers. Assume further that creating a system of exclusion rights, such as a program of ITQs, would raise the value of the yield to $2000, by eliminating the take of young fish before they spawn. Finally, assume that the costs of lobbying the government to create the ITQs would be $400. If the existing ten fishers have relatively equal-sized operations, such that they would most likely divide the ITQs equally, it will be difficult to raise $400 for the lobbying campaign. Each fisher would gain only about $100 from adopting this scheme, so unless there is some way to compel each fisher to help underwrite the lobbying costs, the change may not happen. Suppose, in contrast, that one fisher has a disproportionately large operation, equal to 50 percent of the take, and that this operator would likely command 50 percent of the ITQs. Such an operator would stand to gain $500, which is enough to create an incentive for this one operator alone to incur the $400 lobbying costs needed to make the change. This example suggests that property rights may be most likely to emerge in markets with heterogeneous producers, some of whom would benefit disproportionately from the creation of property.¹⁰

The principal point established by the Demsetz theory is that there are practical constraints on the domain of property. Plenteous resources, negative or low-valued resources, and resources that are hard to pin down or observe are unlikely candidates for inclusion in the domain of property. Conditions that make enforcement of property rights difficult, such as a scarcity of fencing materials or the absence of a functioning court system, will also make it difficult for property to thrive.

Personhood

Another strand of theorizing justifies property in terms of personhood. Human actors act on the world and exercise dominion over external things, and in so doing they constitute themselves as individuals. This is an idea tracing back at least to Hegel,¹¹ and is the springboard for the theory of property developed in the early work of Margaret Jane Radin.¹² According to Radin, property that contributes to personhood is deserving of more protection than “fungible” property. Thus, a wedding ring on the hand of a loving spouse is personhood property, whereas a ring in the inventory of a storeowner is fungible property. The loss is far more of a personal wound in the former than the latter case. Of course operating a store can be the expression of individual personhood, and Radin would not necessarily disagree. But Radin sees danger in “fetishizing” things, and takes a dim view of the personhood and property claims of capitalists in particular. Although certain features of law such as the homestead exemption in bankruptcy can be regarded as reflecting a version of personhood concerns, in U.S. law personhood issues come to the fore primarily in placing constraints on what can be treated as property.

The personhood perspective suggests that even if conditions identified by the Demsetz theory are fully satisfied, there are reasons of social policy for refusing to regard certain kinds of resources as property. We can distinguish two types of social policy constraints grounded in personhood concerns. Strong personhood constraints counsel against treating persons themselves as property. Weak personhood constraints counsel against treating certain things closely identified with persons as property for some purposes such as permitting commercial sales.

Human slavery provides the clearest example of the strong personhood constraint. Throughout much of human history, ownership of one person as property by another was permitted. Today this is universally regarded as a violation of basic human rights. The ban on slavery reflects the principle that all human beings, without regard to race or nationality, should be regarded as autonomous moral agents rather than objects controlled by other persons. The principle is so strong we forbid individuals to contract into a state of slavery or servitude. Various explanations have been given for this, including paternalism (we do not trust people to make an informed choice about this), external costs (others may be anguished by seeing slaves), and the immorality of slavery in all its forms however it arises. Whatever the explanation, it represents a baseline principle about property rights: People can be owners of things but cannot be objects of ownership.

The strong personhood constraint is also reflected in modern conceptions about relations among members of families. At one time, and still today in some places, parent-child and spousal relations were conceived of in a property-like fashion. Parents had absolute control over the children, as husbands did over their wives. Today, parent-child and husband-wife relations are governed by legal norms of family law different from those that apply to property ownership. Like the rule against slavery, these norms are designed to protect the basic understanding that all persons are autonomous moral agents, not simply objects owned by others.

When we move beyond the core case of one person owning another, we are much more likely to encounter weak personhood constraints.¹³ Consider in this regard the many vexing questions about the legal status of human body parts, bodily fluids, and genetic material. The most widely discussed case here is Moore v. Regents of California,¹⁴ which is often cited for the proposition that human body parts are not property. Moore was being treated for leukemia at UCLA Medical Center. Physicians removed cells from his spleen and, without informing him, used these cells to develop a new cell line for which the medical center obtained a patent. The new cell line was thought to have potentially valuable commercial applications. Moore sued the physicians and UCLA, seeking damages for conversion of his spleen cells. The California Supreme Court held that Moore’s complaint stated a cause of action for breaching a fiduciary duty and failing to obtain his informed consent for the medical treatment (by concealing the plans for commercial use of the spleen cells). But the court found he had no action for conversion, because he did not have any “property” interest in his spleen cells.

There are many puzzling aspects of the Moore case, including the court’s apparent assumption that although Moore had no property rights in his spleen cells, UCLA did have such rights in the cells after they were removed. In general, the court seemed worried about imposing unexpected liability on downstream medical researchers who had previously used body tissue or cells for research without inquiring whether they had the right to do so. The court also noted that commercial sales of organs and bodily fluids for purposes of treatment and transplantation are prohibited by the Uniform Anatomical Gifts Act. The court thought it best to await legislative action before treating body cells as the property of the person from whom they are drawn.

Another puzzle is whether the court in fact succeeded in denying Moore a property right in his spleen cells. If property crucially involves the right to exclude, then in a sense the California Supreme Court did give Moore the right to exclude, because once the doctors provided him with complete information about the possible commercial use of the cells, he could always refuse to consent to the surgery. The right to give informed consent assumes the right to say no, which is functionally the right to exclude the doctors from getting their hands on the cells. Of course, this right to exclude would apply only to Moore’s treating physicians; it would not impose any duty on downstream researchers or persons using any medical products developed with Moore’s spleen cells. The right recognized by the court was in personam, not in rem. So maybe the court did succeed in denying Moore a full-fledged property right after all.

A narrower characterization of the court’s holding would be that Moore could not sell his spleen cells in a commercial transaction, and hence could not recover damages based on the market value of the cells. So construed, the decision reflects a concern about permitting commercial transactions in human body parts. This concern can usually be vindicated by eliminating one of the incidents of property—the right to sell. It is not necessary to deny other incidents of property, such as the right to exclude, to use, or to gift. Indeed, nothing in the court’s decision suggests that Moore could not make a gift of his spleen cells for medical research, or could not refuse to permit them to be used for any purpose after they were removed. On this reading as well, then, the court was overstating things in saying that Moore had no property in his spleen cells.

More recent decisions tend to confirm a narrow reading of Moore. In one case, the Ninth Circuit held that the next of kin have a sufficient property right in the body of a deceased relative to demand a due process hearing before body parts are removed by the coroner for transplantation.¹⁵ Another California case held that frozen sperm cells are the property of the estate of a deceased person, subject to disposition by a probate court.¹⁶ The general pattern seems to suggest that the person from whom body parts or fluids are removed has the right to direct or veto how these resources are used after removal. In this sense, persons do have property rights in their body parts and fluids. But there is continued uneasiness about permitting individuals to contract to sell body parts or fluids, at least without affirmative legislative authorization, perhaps out of concern that this would lead to body harvesting or other types of degradation that violate the principle that humans are moral agents and not objects of ownership.

Certain types of cultural objects have also been placed off limits from being treated like ordinary property. The Native American Graves Protection and Repatriation Act (NAGPRA),¹⁷ for example, has been interpreted as prohibiting commercial transactions in certain Native American artifacts that cannot be sold under native customary laws. Again, the concern is with commodification of objects that are regarded as being integral to native cultural practices. There is no suggestion that cultural patrimony is not property for other purposes, such as protection against theft or destruction.

In sum, there are both strong and weak personhood constraints on the domain of property. The strong constraint is represented by the rule that no person can own another person as property. The weak constraint, which is reflected in the cases involving body parts and cultural patrimony, is more accurately characterized as a concern about commodification, and prohibits buying and selling certain kinds of resources. But the weak constraint does not deny the status of the resource as property for other purposes, such as the right to exclude, use, or gift.

Inherently Public Property

A different and opposite limit on the domain of private property involves resources that must be maintained in an inherently public or open-access state. Here, the core case is provided by navigable waterways, which have been understood since Roman times to be a resource that must remain open to access by all persons.¹⁸ In the modern era, navigable airspace has also been described as a resource that is regarded as inherently public.¹⁹ Many would also include highways and streets on this list of things that should remain open to all, although private toll roads are not unknown, and some European cities including London and Oslo now impose user fees on vehicles in congested areas. Public squares, parks, certain public buildings such as courthouses, and beaches are also often regarded as assets that should be accessible by all, and not subject to exclusion rights.

The legal doctrines that serve to protect the open-access status of inherently public resources are various. In the United States, the Commerce Clause of the Federal Constitution has been construed as incorporating a self-executing “navigation servitude” that trumps the application of restrictions on access to navigable waterways and airspace grounded in state law or private property rights. The public trust doctrine, which has roots in Roman law and English common law, has also been widely invoked to block efforts to transfer inherently public property into private property status. Assets covered by the doctrine are owned by the state but are subject to a “public trust,” which inheres in the title. In the strong version of the doctrine, even the legislature lacks power to transfer these assets into private hands or otherwise violate the trust, because the state never had such a power to begin with.²⁰ If such a transfer occurs, the state can revoke the transaction without violating the Takings Clause or other constitutional protections for private property. Doctrines of customary rights, public dedication, and public prescription have also been relied on to protect inherently public property.²¹

The federal landholdings known as the federal public domain represent an interesting and important variant on the idea of inherently public property. The public domain was originally composed of lands west of the Appalachian Mountains that were ceded to the federal government to pay off the Revolutionary War debts. The public domain was later augmented by the Louisiana Purchase, vast tracts of land acquired by treaties with Spain, Mexico, and England, and the purchase of Alaska. The original idea was that this land would be held by the federal government as trustee until it could be disposed of by purchase or otherwise claimed as private property.²² But not all of these vast holdings were disposed of in this fashion, and today about 30 percent of the landmass of the United States consists of federal public domain land. These lands are used for a variety of purposes: grazing, timber harvesting, recreation, and mining, among others. The permissible uses are heavily regulated by the federal government. Whatever the use, however, the general rule is that these lands may be entered by any person who agrees to follow the rules. In designated Wilderness Areas, for example, all motorized vehicles and permanent structures are prohibited.²³ But access nevertheless is open to anyone with a sturdy pair of shoes and a backpack.

Why are certain resources regarded as inherently public? One theory would be that these resources are used by large numbers of people, often on a temporary or transient basis, with the result that carving up the resource into many individual exclusion zones would create very high transaction costs. As we noted in Chapter 2, navigable airspace provides a vivid example. If we applied the ad coleum rule literally and allowed the owners of surface rights to exclude airplane overflights, the costs of assembling flight easements above all the affected parcels would be enormous. At the same time, the owner of the surface typically has no good reason to exclude overflights, assuming they occur at a sufficiently high altitude that they do not interfere with construction of buildings or other activities on the surface. Similar arguments can be made about the high transaction costs that would result from carving up navigable rivers, town squares, beaches, or wilderness areas and subjecting them to private property rights.

Another theory would point to a phenomenon known as network effects to explain the intuition that certain resources should remain in an open-access state. A colloquial expression for network effects is “the more the merrier.”²⁴ The idea is that certain resources become more valuable as more people use them. The telephone system and the Internet are examples. The more people have phones or e-mail accounts, the more valuable it is for others to sign up to join the system, because they have more people with whom to interact. Similarly, it might be argued that the more people use navigable rivers or airspace, the more trade and commerce flourish, and hence the more goods and information disseminate through human interaction. Leaving the rivers or the skies in an open-access state, that is, pricing access at zero, encourages this dissemination. The same is plausibly true of highways and town squares. Perhaps parks, beaches, and street fairs share this quality as well—at least up to a point. With physical assets like rivers, beaches, and street fairs, congestion may eventually set in, requiring that some kind of rationing mechanism be established. In the electronic world of telephones and the Internet, congestion is less likely to be a problem.

A third theory is that certain resources should remain open to all in order to promote sociability.²⁵ The model here might be the agora of ancient Greece, where citizens gathered every day to trade, gossip, hear the latest news, and see and be seen. The agora provided the social glue that kept the society together. Similarly, keeping parks, beaches, and even navigable rivers open to all encourages random meetings and encounters, and allows for spontaneous gatherings of citizens. This unplanned mixing of people can help develop tolerance for persons of different backgrounds and ideas, and can perhaps build bonds of community among individuals who otherwise have few occasions to interact.

Hybrid Resources

There are also some important resources that are hybrids, in the sense that they share attributes of both ordinary goods subject to exclusion rights and public goods that remain in an open-access state. Water is a prime and interesting example. Water can be captured in a tank or bottle, in which case it is much like other commodities that are generally treated as private property and are subject to exclusion rights. But in its unconfined state—in a river or stream or pond or an underground aquifer—water has unique features that make it difficult to assimilate to the world of ordinary commodities. Water is subject to the hydrological cycle, in that it evaporates, falls as rain, and evaporates again. It also flows downhill and seeps into the ground if not kept in an impermeable container. There is thus a public-rights aspect to water, in the sense that certain uses or misuses of water by one person will affect the interests of others who might benefit from the water after it evaporates or flows away from the first user.

Given the unique attributes of water, the law has responded by creating regimes of rights that are unique to water. One general principle here is that water rights are usually linked to the ownership of land. In areas where water is relatively plentiful—generally speaking, in England and the eastern states of the United States—rights attach to the land where water is found. Ownership of land that abuts a body of water, called riparian land, confers rights to the water, which go with the ownership of the land. Under the natural flow theory that prevailed in the early common law, a riparian owner could block any diversion that significantly modified the natural flow of a river or stream or level of a lake or pond. Under the reasonable use theory that is more commonly used today, courts will balance the interests of different riparian owners to determine whether diversions or other uses are permissible.

In dry areas where water is scarce—generally speaking. the western states in the United States—rights to water attach to the ownership of land where the water is used, which may or may not be the land on which it is initially found. In its original form, this system established rights to water in accordance with temporal priority in appropriation of the water for a beneficial use. The first appropriator had the first claim, the second appropriator the next claim, and so forth. Hence this system is often called the prior appropriation system. Unlike riparian rights, water rights in a prior appropriation system can be sold separately from the land they are currently being used on, but the new use must not harm return flows that have been appropriated by downstream users. Over time, the pure system of temporal priorities has been extensively modified by an overlay of regulation that limits what constitutes a beneficial use and protects other users who may be harmed by diversions. Some states, notably California, have developed systems that combine features of riparian rights and the prior appropriation system.

A common feature of all water rights is the attachment of the rights to land, either the land where the water is found or where it is used (recall the discussion of accession Chapter 2). An explanation might be that this allows for water rights to be uniquely assigned to particular persons. The owners of these rights can therefore deploy the resource to maximum advantage, and internalize externalities. Yet another common feature of water rights, at least in the modern era, is extensive public regulation of uses, so as to protect the interests of other persons interested in drawing on the resource.²⁶ For example, consumptive uses may be restricted to amounts deemed reasonable, in light of the needs of other competing users. Similarly, transfers of water rights, especially diversions outside the watershed, typically require regulatory approval to assure that third parties are not harmed. Thus, water law simultaneously has both an exclusionary aspect, and strong public rights aspect. Which aspect dominates is driven in part by the nature of prevailing uses: Water law in the eastern United States has historically been less intense and more oriented around nonconsumptive uses such as waterpowered mills, whereas Western uses such as irrigation and mining tend to be intense and make the water used unavailable to other local users.²⁷

Intellectual property is another prominent resource that has a hybrid private-public quality. Here, the mixing does not mainly occur simultaneously, as with water rights, but rather by carving out “islands” of exclusion within a general sea of open access. The background rule for information goods—ideas, expressions, images, symbols—is one of open access. Anyone and everyone can use, copy, or elaborate on information goods without obtaining the permission of anyone else. The justifications for this background rule are similar to those previously mentioned for inherently public property: Exclusion rights would create high transactions costs; information goods often have network effects (certainly this is true in the case of language systems and many computer programs); and making information goods freely available may enhance social interaction. In addition, once an information good is produced, it can be used or copied over and over at little or no additional cost. It costs no more for a thousand people to think a thought or recite a poem than for one to do so. Economists say that information goods are “nonrivalrous,” with the implication that the correct price for such goods is zero.

This is not the whole of the story, however. As mentioned in Chapter 2 in connection with hot news, if all information goods were subject to open access and consequently priced at zero, there might be insufficient incentives for creative individuals to devote themselves to producing and commercializing new information goods. Inventors, novelists, and songwriters—some of them at any rate—might decide that there is little point in laboring to create new information goods if they have no way to appropriate the value these goods provide for others. In addition, industrial firms, publishing houses, and recording studios might decide that there is little point in improving, marketing, and distributing information goods (or things produced with information goods) if they have no way of assuring a return on their investments in these activities.

For these reasons, the U.S. Constitution authorizes Congress to create “exclusive rights” in certain information goods for “limited times”²⁸ —what are known as patents and copyrights. (Other intellectual property rights, such as trademarks and publicity rights, have also been created, under the federal Commerce Clause and state law, respectively.) These intellectual property rights, which give owners the exclusive right to use certain delineated information goods, are limited in scope. They apply only to a subset of information goods that meet certain prescribed criteria, such as novelty and usefulness (in the case of patents) and originality (in the case of copyrights). And they typically last for a limited time, such as the period of 20 years minus the duration of the application, under the current Patent Act.